If you are a homeowner and need money, perhaps the first thought would be to use your home as collateral for the loan. And while it is one of the ways, there are several other alternatives to how you can use your equity to your advantage, and one of them is cash-out mortgage refinancing.
Whether or not cash-out mortgage refinancing is the best option for you depends on a lot of factors that we look at in this post. So let’s get started.
Cash-Out Mortgage Refinancing – What Is It And How Does It Work?
Cash-out mortgage refinancing allows you to take advantage of your current home loan so you can take out a loan worth more than your original mortgage. You use the loan for several purposes, ranging from repayment of the original mortgage to any other purpose, including home improvement or for completing other financial or non-financial goals.
The loan you get is worth more than what you would get with traditional refinance, which covers the same amount you owe on the house traditionally at a lower interest rate.
If that sounds confusing, let us explain it.
Let’s say you took out a $100,000 mortgage to pay for your home 10 years ago. You now owe $50,000 on the house. You decide you remodel your home. If you opt for cash-out mortgage refinancing, you can take out a cash-out mortgage refinancing loan worth $90,000. Out of this $90,000, $50,000 will cover the remaining mortgage balance, whereas you will still be left with another $40,000, which you can use as you want.
On the hand, if you opt for traditional refinancing, you will be only able to cover the amount owed on the house, which is $50,000. However, the interest rate would be lower.
Pros and Cons of Cash-out Mortgage Refinancing
Let’s take a closer look at the benefits and drawbacks of a cash-out mortgage refinance, so you can decide if it’s the right choice for you.
Benefits of Cash-Out Mortgage Refinancing
Lower Interest Rates
If you lend your original mortgage at a time when the interest rates were high, you can get the benefit of lower interest rates by opting for a cash-out mortgage refinancing now, as the interest rates are lower today than they were five years ago.
Allows You to Consolidate Your Debt
When you opt for cash-out mortgage refinance, it allows you to consolidate your debt, especially when you are around a tight corner.
Potentially Positive Impact on Your Credit Score
If you use the extra cash-out mortgage refinancing money to repay your debts, such as your credit card debt, your credit score may improve, which can enhance your access to a loan in future – possibly when interest rates are even lower.
Cons of Cash-Out Mortgage Refinance
Risk of Foreclosure
Perhaps the most significant drawback of cash-out mortgage refinance is that you are at the risk of losing your home if you miss enough mortgage payments. Make sure you keep this in mind as you plan to use a cash-out mortgage refinance, especially if you are using it to repay your secured (like homes) and unsecured debt (like credit cards).
The Terms and Conditions of A New Loan
Similar to any other refinancing option, a cash-out mortgage will come with a series of fees and closing costs that you will have to consider before you sign the contract. Make sure you consider all the costs before you make the final decision.
Is Cash-out Mortgage Refinance Right for You?
Cash-out refinancing may be a great idea for many homeowners however if you are considering cash-out mortgage refinancing, you need to think about all the pros and cons of this refinancing choice. Remember, your home is the most precious asset, and you should only use it as collateral when you have clearly thought out your complete financial situation.
Cash-out mortgage refinancing is one of the most cost-effective ways to pay for significant expenses, including home improvement and debt consolidation. However, it should only be used after a careful evaluation of your complete financial situation.
To learn more about whether cash-out mortgage refinancing is the best choice for you, get in touch with Integrity Mortgage NMLS #1692497 today and secure your property while consolidating your debts. Call us now at 833-775-4200 to schedule an appointment.